Currently, there are three networks responsible for generating and disseminating consolidated market data to the public under the joint self regulated organizations (“SRO”) plans and the Exchange Act Rules. The three networks are the NYSE, AMEX, and NASDAQ (“the networks”). The networks collect revenues from public subscribers to their market data feeds. The networks are required by the network plans and the Securities and Exchange Commission (“SEC”) to redistribute the subscriber revenue to any SRO that contributed quote and trade data to these market data feeds after deducting certain costs including the cost of administrating the redistribution. The existing revenue distribution formulas among SROs are based solely on trading activity of each SRO. Currently, revenue is not distributed based on quotes. However, when the SEC implements Regulation NMS (“Reg NMS”) the existing formulas will no longer be used.
Under Reg NMS, the plan formulas will be modified to include three new components: Security Income Allocation, Trading Share, and Quoting Share. The Security Income allocation component involves the appropriation and aggregation of revenue across all symbols for each SRO based on the square root of the dollar volume of all trades occurring during the year. The revenues for each symbol will then be split between Trading Share and Quoting Share. The Trading share portion will be 50% of the revenue in a specific security. The Quoting share will account for the other 50% of the revenue.
The formula, adopted by Reg NMS, for allocating quote share is the dollar amount determined by multiplying the quote share of the security income allocation for the specified symbol by the SRO's quote rating in a given security. An SRO's quote rating is determined by dividing the number of quote credits earned by the SRO by the total number of quote credits earned in the symbol by all SROs. Reg NMS states that an SRO is entitled to a quote credit (QC) only when a price is displayed at the National Best Bid Offer (“NBBO”) for at least one full second. The QC formula derived by Reg NMS is the following:QC=# of seconds price shows at NBBO×quantity×price
One method for allocating subscriber revenue among the SROs under Reg NMS was developed by the Tee Williams Group. This method is designed to assign Quote Credits accurately when quotes are being posted and removed on the scale of milliseconds compared with the one-second interval specified by Reg NMS. This method was also developed to overcome distortion of the true NBBO by participants that enter “flickering quotes,” that is, quotes that are posted for short intervals. Such flickering quotes have the effect of preventing other participants from being at the NBBO for a full second but do not contribute to price discovery. The Tee Williams method was also designed to deal with the fact that the quantity of quotes is constantly fluctuating on each of the network exchanges. The Tee Williams method overcomes these problems using a complex algorithm, which is described in Greenbaum, Lee and Williams, R. Tee; CTA/UTP Revenue Allocation Functional Requirement Specification, Nov. 16, 2006, Ver. 3.1.
The Tee Williams method is used by the Networks to distribute subscriber revenue among SROs. It is impractical for individual SROs to use this method to distribute that revenue among individual market participants. Because of the enormous amount of data required to perform the Tee Williams calculation and the complexity of the algorithm, it would require a large team of developers and testers to implement a similar system at the level of an individual exchange. Moreover, there is no guarantee that the resulting calculation would accurately track the same distribution within an individual exchange as the Tee Williams method does among SROs because of timing differences between market data feeds.
The Tee Williams method allocates market data revenue among a relatively small number of SROs. There is a need for a system where SROs can distribute the market data revenue they receive from the networks to their own members who place quotations and orders on their markets. By providing this revenue to their members, an SRO can incentivize those members to place more and larger orders on their markets. Distributing market data revenue also gives an SRO a competitive advantage over other SROs that do not distribute this revenue. But allocating market data revenue using the Tee Williams method presents a problem for SROs. The Tee Williams method is computationally intensive and requires dedicated resources and personnel to administer and maintain the necessary hardware and software. It is workable where total amount of revenue to distribute is relatively large compared with the costs to operate the system. What is required is a method and system to calculate member Quote Credits that remains true to the formula required under Reg NMS, that minimizes the impact of flickering quotes and rapid changes in quotation size that is simpler to code and maintain, more easily implemented and computationally more efficient than prior art methods.